E-drug: USA drug prices debate flares up (cont)
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Friends,
The amount companies spend on promotion is usually more than on research.
Neither cost is very important to price setting.
The answer to all of David Henry's questions is: Yes, these factors are all
part of the complex problem.
In theory, low prices occur when reality is close to the "pure competition
model" i.e. many competing manufacturers, a standardized product, prices
determined by the market and easy for new companies to enter the market.
The reality with drugs is far from that model.
I would add that the current concentration of power and wealth under the
control of corporations with limited accountability is a key part of the
problem.
2 books worth reading:
John Ralston-Saul. Unconscious civilisation. 1997
Ralph Estes. Tyranny of the bottom line: Why corporations make good people
do bad things. 1996
To the extent that politicians can only gain power by taking "donations"
from (and thus working for) corporations countries become plutocracies
rather than democracies.
I hope the following (copied from the MaLAM Web site
www.camtech.net.au/malam ) is helpful.
Peter Mansfield
Medical Lobby for Appropriate Marketing
Adelaide
South Australia
"Peter Mansfield" <peter.mansfield@flinders.edu.au>
[signature and address details manually added. BS]
From MaLAM website:
According to Lidstone (1987) pharmaceutical companies may use one or more
(often all 4) of the following four approaches before setting a price:
Cost-based pricing.
Market demand-based pricing.
Competition-based pricing.
Perception-based pricing.
Cost-based pricing
The price can be calculated from the total of the cost of production and
marketing costs, plus an allocation for overheads plus a target percentage
for profit.
This is the method used in general marketing to price many goods and
services. However, in the pharmaceutical industry it is often only used to
indicate the minimum price. Nevertheless, this approach can be used to
determine excessive prices by overstating the components (eg research
costs).
Market demand-based pricing
The price can be calculated by estimating the balance between price and
volume of sales (market penetration) that will maximize profit.
In "ideal" markets if the price is increased then the volume of sales will
decrease. The extent to which this occurs in a real market is measured as
the "price sensitivity". Poor people are much sensitive to prices than
wealthy people. However price sensitivity for pharmaceuticals is generally
much less than for other goods, especially when the pharmaceuticals are
subsidised or are correctly or incorrectly believed to be essential.
This approach often leads to prices which are out of the reach of the poor,
who often need essential pharmaceuticals more than the wealthy.
With subsidies this approach may lead to excessive prices for the third
party payer.
Companies may choose one of the following strategies:
High price and low volume (skimming) eg the Rolls Royce
Low prices and high volume (penetration pricing)
Medium prices and medium market share
Competition-based pricing
Prices can be set above, below or at the same level as the competition.
If a company and/or the market believes that the Product or the Promotion
are superior to the competition then the company may set a price above the
competition even if production costs are lower. If a product has no
advantages it may be given an advantage by giving it a lower price. This is
important for generic drugs.
Perception-based pricing
Prices can be set according to the "perceived value" of the product.
The perceived value can be increased by improving the Product or by using
better Promotion.
For example:
"Glaxo obtained a higher price for Zantac compared with Tagamet, which was
the first and the market leader. The high price for Zantac was justified in
the doctors' mind by a "prestige" campaign, which successfully
differentiated the two products and positioned Zantac as "Super-Tagamet"."
- Lidstone (1987)
Lidstone J, Collier T. Marketing Planning for the Pharmaceutical Industry.
Aldershot UK, Gower 1987
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